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The gas crisis that never was

The gas crisis that never was

April 20, 2023
“Switzerland’s energy provision is currently assured.” These were the dry, clear words of the latest assessment by the Federal Office for National Economic Supply. Whilst the terms gas shortage and power shortage were constantly used in public discussion before the winter, now almost everything seems to have been forgotten.

Original article: Neue Zürcher Zeitung, 20 April 2023

Yet the Russian war against Ukraine has already entered its second year and Russian gas supplies to Europe are likely to remain as scarce in the foreseeable future as they have been since the middle of last year. The future market price for natural gas in Europe has, however, fallen sharply since reaching the soaring heights of more than EUR 300 per megawatt hour in August 2022 – the price is currently listed on the TTF trading platform at just EUR 43. At the same time, the heating period has come to an end and the gas storages in Europe are still 56 percent full – above average for this time of year.

The weather is unpredictable

Does this mean the gas crisis has been averted? The sector itself and experts are warning about being far too careless in dealing with this risk. Above all, next winter looks set to be a test of how secure the European, and therefore also Swiss gas supply is, especially as Switzerland does not have its own gas storage facilities. In addition, the gas price is an important factor for the electricity prices in Europe.

“The gas crisis is definitely not over,” says György Vargha, head of gas trading at the energy company MET Group, headquartered in Baar. According to Vargha, half the missing Russian gas supplies to Europe have been replaced by additional quantities of liquefied natural gas (LNG). The other half has been saved thanks to a lower demand from companies and end consumers as well as mild weather conditions.

These observations provide the critical factors for the near future: the weather is unpredictable. It is not only about how cold it will be in the coming winter, which has a big influence on gas consumption. A period of hot weather in the summer, which has already been forecast, would also be problematic. Among other things, heat means low water levels in the rivers, which would affect the transport of energy commodities via traffic arteries such as the Rhine. It would also affect hydropower plants.

Heat also means warmer river water which could be a problem for the cooling systems of several nuclear power stations, like the ones in France. The bigger problem last year, however, was that half the nuclear reactors in France were not operational in the summer and autumn due to maintenance work and investigations into corrosion damage. This also led to higher demand for coal and gas for power generation.

There are currently 36 out of 56 nuclear reactors in operation. Due to the threat of strikes in France, uncertainty remains about how ready the reactors will be. This is also reflected in the electricity prices for supplies at the end of the year, which are higher for France than for Germany.

A communications dilemma

The decline in demand for gas has saved a considerable volume. With falling prices, some companies have started up production facilities again, the operation of which they had previously halted. Additionally, it remains unclear whether certain energy-efficiency measures taken by companies and households will bring long-term savings. Vargha further observes: “We also remain in a crisis situation while companies say that they cannot produce at these energy prices.”

If the awareness of a crisis situation fades, demand is likely to come back, particularly for households. The authorities are in a huge communications dilemma. Should they over-dramatise the situation so that the population remains mindful about energy consumption?

Yet if a crisis is counteracted in this preventative way and then possibly never occurs, it can lead to criticism of the dramatisation. The Federal Office for National Economic Supply is at any rate already recommending using the warmer months to prepare for the coming winter.

Infrastructure alone is not enough

Europe imported more LNG last year than ever before to replace Russian gas. However, if the European gas price falls, generally speaking, more LNG will be diverted from Europe to Asian countries which are prepared to pay a higher price. A big question mark currently hangs over demand from China and the development of the global economy.

For Norbert Rücker, energy expert at the bank Julius Bär, it is clear that the European gas and electricity prices will now be determined by the global LNG price. He is optimistic that the situation on the energy market will return to normal from 2024. But until then the new supply is limited. It will take about two years before larger projects come to the market in the US, Canada or Qatar and relieve the pressure on prices.

Germany, which until now had no terminals for importing LNG, built these facilities in record time. The EU’s largest economy wanted to be able to cover its energy needs more flexibly than before. Jörg Selbach-Röntgen, CEO of MET Germany points out, however: “In Germany there is still a widespread view that LNG appears like magic, as it were. Simply having built the infrastructure is not enough.” So far the LNG volumes are not yet flowing to any significant degree.

Producers of liquefied natural gas like to insist on long-term contracts when they sell it in order to safeguard their investments. Buyers, however, would prefer shorter contracts, especially as the energy transition makes the demand for the fossil fuel of natural gas precarious. This conflict of interests also means high prices in the short term when demand is high.

At MET, they are convinced that whilst this year the gas prices will not reach the dizzying heights of 2022, the price range could be between EUR 30 and 90 per megawatt hour, and depending on what happens, even exceed EUR 100. This would be considerably more expensive than the average in the years before the energy crisis. The current price level could therefore be deceptive for companies who have not made provision for rising prices.

Russia supplies LNG

Despite all the efforts Europe has made to wean itself off Russian gas, the Kremlin can still continue to influence the situation on the market. Russia continues to supply natural gas to Europe, even if it is only one fifth of the previous volume of pipeline gas. If these quantities are cancelled too, the situation will get tighter again.

Moreover, last year, according to figures from the market intelligence service ICIS, around 13 percent of LNG imported by Europe came from Russia. There are already efforts being made in the EU to ban these shipments. But Russia, too, could gamble on reducing them. Gas analysts at ICIS, however, assume the effects would only be minor if these scenarios came to pass.

But ICIS also says that the crisis is not yet over but negligence towards the problem has not yet taken hold in Europe. Thus EU countries have already agreed, just like last year, to voluntarily lower gas consumption by 15 percent compared with the average between 2017 and 2022. In Switzerland the regulation for provision of a gas reserve has been extended by one year. It is therefore likely to be a balancing act as to whether Swiss authorities can continue to announce in the winter months: “Switzerland’s energy provision is currently assured.”